August 20, 2015

Diminishing Returns

Back in the early 1990s, a large part of my job was dedicated to measuring the incremental value of additional advertising.

The relationship between advertising (x-axis) and demand generation (y-axis) looked very similar to the curve you see depicted in this image. You got a lot of benefit by contacting customers ... and then ... you got less incremental benefit ... and less ... and less. Eventually, you were advertising and were essentially generating almost no incremental value.

Many of you wonder why I demand that you focus, not on customer loyalty, but instead, on acquiring new customers at a low (no) cost. This graph is the reason.

Here's what happens ... you eventually reach a point where you do not generate a sufficient return on investment. As you approach that point (not go past it, mind you, but as you approach it), the incremental cost to convert the customer to another purchase is greater than the incremental cost required to acquire one additional buyer.

This is where it gets interesting ... because if you decide to shift your advertising dollars to customer acquisition, then you end up with more customers ... and that means you get to market to two good customers instead of one very good customer. Unless you are Nordstrom or Wal-Mart or Verizon or Amazon, you want two good customers more than you want one very good customer.

Modern attribution work makes it very difficult to see the law of diminishing returns in action. You can easily see it within paid search. You can easily see it within retargeting. You can easily see it within email marketing. It's terribly hard to see the law happening across an integration of all three disciplines.

Make sure your attribution vendor is illustrating the law of diminishing returns to you. The best attribution vendors will be able to recreate their version of the graph above - quite easily - within a few hours of your request.

Profit per New Customer

It's common for folks to measure cost per new customer. Total Marketing Cost = $10,000. Total New Customers = 130. Cost per New C...